An Incorrect Assumption

6/3/09 edit CXO has now deleted their old post and re-run the tests using the correct indicator. Their corrected post can be seen by using the link below.

CXO Advisory posted a column this morning in which they attempted to refute the effectiveness of the 10-week Nasdaq/S&P 500 lead/lag indicator. In their column they referred to my post of last week and Gerald Appel’s book which I referenced as the origin of the indicator. They then ran several unrelated tests to show that 10-week RSIs are not effective in determining future returns. It is important to understand that RSI was not the indicator described by Gerald Appel nor used in my testing.

Frankly, in the past I’ve found some interesting things on their site, but their lack of attention to detail here is flabbergasting. If they had either 1) opened the book, or 2) downloaded the spreadsheet I provided for FREE with the complete research supplied, they would have understood this. Instead they ran their own tests using a completely unrelated indicator.

Their tests ran from 2005-present. They showed that over the 2005-present time period buying the S&P when the 10-week RSI of the Nasdaq was above the 10-week RSI of the S&P would have lost money. This doesn’t surprise me.

For anyone who has downloaded the free spreadsheet, if you plug a round number (such as $1,000 or $100,000) into the 12/31/04 row you can see the following results from then until 5/22/09. The S&P would have lost about 25% (not including dividends). The model (assuming 0% interest on cash and not including dividends) would have gained about 11.6%.

In the next few days/weeks I will be publishing some more research that pertains to this indicator. I hope readers will find it valuable.

In the future should CXO attempt to refute the work of others I would hope they at least make an effort to look at the work they are refuting.

One final note, the Nasdaq/S&P 500 lead/lag indicator signaled a buy on Friday’s close. Subscribers to Quantfiable Edges are now notified of all model changes via the new Quantifinder technology.